There are tons of buzzwords surrounding finances and investment, making it difficult for the average person to know where they should put their money. In today’s day and age, we’re also living in a hyper-conscious society, where people are aware of the power of a dollar. When it comes to investing, it’s important to know where your money is going and what it’s being used for when it gets there. This is where sustainable investment comes in, and I’m here to give you a quick run-down on what exactly sustainable investment is.
What is sustainable investment, and what does it look like?
Traditional investing creates value by converting investor funds into investment opportunities with risks that are proportional to projected returns. To improve long-term outcomes, sustainable investing combines traditional investing with environmental, social, and governance (ESG) considerations.
Sustainable investing can be considered as part of the evolution of investing in several ways. Industry participants are increasingly recognizing that some ESG aspects are important factors when it comes to investment, especially in the long run, and that it is, therefore, critical to incorporate material ESG factors. Sustainable investing is a supplement to asset management theory, not a rejection of core notions. It also elicits new insights into how value will be created in the future based on environmental, social, and governance (ESG) factors. Diverse stakeholders are considered in sustainable investing, which is in line with how businesses are evolving.
The demand for investment organizations to shift to a sustainable investing model is increasing as interest in sustainable investing grows. The United Nations-backed Principles for Responsible Investment, an international network of asset managers representing more than US$80 trillion in assets, has lent credibility to these investment strategies by raising awareness and educating investors about the importance of considering E, S, and G factors.
The alternative of maintaining the status quo in an era when the investment sector is confronted by rising end-client and regulatory demands as well as adverse economics leaves the industry vulnerable. Industry leadership and innovation in investment thought and practice, as well as data management, will be critical in the next stage of development.
There are many investments that might be termed “sustainable” if they follow the ESG framework. For most people, industries that encourage good environmental practices, such as using more renewable energy sources or addressing air and water pollution, spring to mind first. Investing in companies that promote human rights projects or have a more ethical corporate culture, on the other hand, is also a form of sustainable investing.
Sustainable investing seems to be working, too. Environmental, social, and governance variables have all been found to assist lower risk exposure and buffer portfolio drawdowns. According to MSCI data, the poorest 20% of ESG stocks faced drawdowns three times more frequently than the top 20% of ESG stocks when the MSCI World Index was ranked by ESG score.
Furthermore, research has shown a link between a company’s ESG score and its financial performance. According to a meta-analysis of over 2,000 empirical studies conducted over the last 50 years, research has shown a 62% positive link between a company’s ESG performance and its financial performance.
The different kinds of sustainable investment
Sustainable investment can be broken down into numerous categories. The first is called “exclusionary screening.”
Based on ethical, moral, or religious values, it excludes enterprises, industries, or countries. The goal is to avoid exposure to a certain set of securities while still pursuing a standard investment goal (e.g., growth, income, etc.). Due to the extent of exclusions, which might include entire countries, sectors, industries, or enterprises, exclusionary screens can have a smaller or more substantial impact on performance than a standard strategy or benchmark.
“ESG Factor Integration” is the second subset of sustainable investment. In the investment decision-making process, ESG data, research, and analysis are combined with standard financial analytics.
Investment in unfavourable countries, companies, and so forth may not be explicitly prohibited. It incorporates environmental, social, and governance (ESG) hazards into the analysis of all assets as a component of financial risk, with two basic goals in mind: to reduce risk or increase performance while pursuing a traditional investment objective (e.g., growth, income, etc.). Due to the emphasis on controlling risks connected to ESG concerns and their possible influence on long-term performance, research has shown that integration has a beneficial impact on long-term performance.
“Shareholder Engagement” makes use of the power of shareholders and stakeholders to influence business conduct directly or indirectly. It influences business behaviour to advance an issue, including the environment, social issues, or governance efforts. The investment objective of a strategy may or may not include engagement and shareholder activism. There is no direct performance impact directly tied to engagement or shareholder action; nevertheless, actions taken by particular companies in response to involvement in addressing long-term ESG risks may have an indirect, positive influence.
“Thematic Investing” encourages investments in sustainable companies that are involved in things like energy efficiency, green infrastructure, clean fuels, low-carbon transportation infrastructure, etc. It also exposes investors to a specific subject, which is tied to one or more issue areas where social or environmental needs have the potential to provide growth prospects.
There are expectations that performance will be comparable to or better than those of organizations in similar industries. Because of the more restricted focus, performance may differ dramatically from broad benchmarks. Additional impact-related performance metrics may be introduced.
Lastly, we have “impact investing.” This involves investing in businesses, organizations, and funds that are made with the goal of generating a measurable, positive social and/or environmental effect in addition to a financial return. Concentrate on making a measurable difference in one or more issue areas where meeting social or environmental needs may necessitate some financial sacrifice. The precise impact of the portfolio aligning to its purpose is how most strategies are evaluated. Traditional performance metrics are sometimes secondary or even meaningless in impact-first or 100% impact programs.
Transparency and honesty are foundational to sustainable investment concepts, and these ethics are integral to many people who wish to grow their wealth. If you are concerned about where your money is going, or you’re looking to invest somewhere you can feel good about, sustainable investment might be the path for you! Anyone can benefit from more transparency in the financial industry, and I believe that sustainable investing is not only the future of finance but the future of democracy as well. Your dollar carries much more weight than you would think, and if more people invest in sustainable businesses, then more sustainable businesses will exist!
Hopefully, the future will be full of sustainable investment opportunities. If you’re looking to learn where to put your money, contacting a financial planner can help. At Grow Your Wealth Financail Planning, I’m passionate about creating sustainable growth opportunities for Canadians just like you, and together, I believe we can invest in a better future for all of us.